The Experts

A no-brainer for first home owners

If you have kids or grand-kids who will be looking to buy their first home sometime in the next decade, or you are still hoping to achieve that goal yourself, the Government’s new First Home Super Saver Scheme (FHSS) is an absolute no-brainer.

Announced in last year’s budget and only now starting to get some real airplay, this scheme will help people save the deposit on their first home sooner. Because it is tightly capped, it is also no silver bullet in addressing the housing affordability issues many young adults face.

But it will help first home buyers, and as it has virtually no downsides, it is a no-brainer. Let me explain.

First Home Super Saver Scheme

The scheme allows savers to make voluntary contributions to super of up to $15,000 in any one year, and then up to a maximum of $30,000 over the duration of the scheme. This means that a couple can effectively save $60,000.

The voluntary contributions to super can be out of “pre-tax” dollars – just like salary sacrifice contributions, making it particularly tax effective. Inside super, the contributions earn a deemed rate of interest (currently set at 4.78% pa). When withdrawn from super, participants have 12 months to sign a contract to buy their first home or start construction of their home.

Some participants will also pay some tax on the withdrawal (taxed at their marginal rate less a 30% tax offset), but even allowing for this, the Government says that participants will save 30% faster than if just investing the money in a bank account or term deposit.

Take this example. Bob earns $80,000 pa. If he makes $5,000 in voluntary contributions through salary sacrifice each year into the FHSS for the next 6 years, when he comes to withdraw it, he will have $27,189.

If Bob invested the equivalent post tax dollars each year in a term deposit paying interest at 2.0% pa (on $80,000 pa, Bob is paying tax at a marginal rate of 34.5% so the amount he has to invest is $5,000 - $1,725 = $3,275), his investment will be worth $20,330.

$27,189 in super - $20,330 outside super. Bob will be $6,849 or approximately 34% better off by saving in the scheme.

Rules

As you would expect, there are rules relating to both eligibility and the contributions.

You are eligible to participate in the scheme if you have never previously owned property. There is no age limit or minimum – but you must be at least 18 to make a withdrawal from the scheme. And you must intend to live in the property as soon as practicable, and for at least 6 months of the first 12 months you own the property.

The main exclusions – if you own or have owned an investment property (and of course, a family home), you are not eligible. And the monies must be used for a home or home and land package – you just can’t use the funds to buy land.

Eligibility is assessed individually, so while your partner might not qualify (because he/she owns an investment property), you can still qualify.

On the contribution side, voluntary contributions through salary sacrifice count against the concessional cap of $25,000, which also includes any other salary sacrifice contributions and your employer’s compulsory 9.5% contribution. Although not as tax efficient, you can make non-concessional contributions (from your own after-tax monies), up to the scheme’s limit of $15,000 in any one year or the $30,000 lifetime limit.

Downsides

Hard to think of any. If you put money into the scheme and never buy that first property, then the money will be stuck in super until you turn at least 60 years of age. And it may earn a sub-optimal rate of return. Also, if you are a canny investor and can consistently earn a double digit rate of return by investing in higher risk assets such as shares, you may be better saving outside this scheme. The reality, however, is that most cannot.

Bottom Line

A no-brainer for most young adults (or those still wanting to buy their first home). To learn more, visit the government’s website and calculator here or contact your super fund.